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tods5eshoes · Wysłany: Śro 5:36, 16 Mar 2011 Temat postu: red ghd 5881

Bond Yields And Forex Trading
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Interest rates play a pivot role in any economy. High interest rates can increse the cost of doing business. It is the job of the central banks to increase or decrease the interest rate in the economy. In US, FOMC ( Federal Open Market Committee) of the FED is responsible for deciding upon an interest rate increase or decrease. FOMC meetings are keenly watched by the market analyst. This is one of the most market mover announcement and can affect many currency pairs in the world. Interest rate changes can have both short term as well as long term implications for the currency markets and can drive them in either direction up or down!
Currency markets and interest rates are intimately interconnected. As a currency trader, the most important thing for you is to know the interest rate differential of the currency pair that you are trading. You calculate this interest rate differential by taking the difference between the interest rate on the first currency in the pair also known as the base currency and subtracting the interest rate of the second currency in the pair also known as the counter currency from the first interest rate. This interest rate differential is calculated at 5: 00 PM EST every day by the brokers. If it is positive, you are paid this interest by your broker. Yeah, this is true. If your broker is not doing it than you are being cheated. On the other hand, if this interest rate differential comes out to be negative, this amount will be deducted from your account. Knowing this thing is very important for any currency trader. Surprisingly many traders are ignorant of this fact.
Majority of investors are primarily yield seekers. Large banks,[link widoczny dla zalogowanych], hedge funds,[link widoczny dla zalogowanych], corporations, pension funds and institutional investors are always shifting their funds from low yielding assets to high yielding assets.
Now, let's take an example to make things more clear. Take the example of Switzerland and United States. Suppose, Swiss 10 year government bonds are paying a yield of 5. 5%. On the other hand, the US 10 year government bond also known as a US Treasury Note is only paying 2. 0% interest. The yield spread between the two government bonds will be 3. 5% or 350 basis points. This yield spread is in favor of Switzerland. Swiss government wants more foreign investors to come to Switzerland and deposit their money in Swiss Banks. Now, Swiss government decides to further increase the interest rate by 0. 5% or 50 basis points. The new bond yield spread will be now 4. 0% or 400 basis points. More foreign investors will start flocking towards Switzerland. This will put an upward pressure on Swiss Franc (CHF) and in the near future CHF will appreciate relative to USD.
So how do you calculate the interest rate differentials for currency pairs? The best method is to use yields on the 10 year government bonds. THe data is easily available on Bloomberg. For example, in case of GBPUSD pair subtract the yield on 10 year US Treasury Note from the British 10 year gilt. However,[link widoczny dla zalogowanych], in case of EURUSD use German 10 year bond instead of gilt. Keeping track of the trend in interest rate differentials overtime can give you a leading indication of appreciation or depreciation of a currency relative to the other in the currency pair.
Make a graph of this interest rate differential overtime! If this graph is steadily moving up, it means that the currency pair is going to appreciate and if it is steadily going down, it means that the currency pair will depreciate. Understanding this correlation between the currency pair prices and the interest rate differential can be highly profitable for your currency trading career!
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